Ondo Finance brings institutional-grade products on-chain, pushing for a new era of financial inclusivity and access. Conceptually best construed as fleshy connective tissue, Ondo does the heavy lifting, integrating all the required parties and compliance components to deliver on-chain access to real-world assets.
At the highest level, Ondo Finance bridges the decentralized and traditional finance landscapes, offering yields from the latter with the convenience and accessibility of the former.
Key Takeaways
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Ondo Finance improves the current DeFi-to-TradFi rails and offers access points to real-world assets, bringing institutional-grade products on-chain.
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USDY is Ondo’s newest product, and this interest-bearing stablecoin provides direct and fully compliant access to US-denominated yield.
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Bringing US Treasury yields on-chain has been the protocol's explicit focus, and its OUSG Fund has already attracted over $165 million in TVL, highlighting the booming demand for a tokenized version of TradFi’s leading risk-free asset.
What Is Ondo Finance?
Ondo Finance delivers on-chain access to bond markets. Investors connect their wallet, deposit USDC or wire USD, receive their tokens, and when desired, request a redemption either in stablecoin or USD.
The value proposition, and returning to the concept of fleshy connective tissue. Ondo and all associated protocols have been built to eventually run independently. The leg work comes from Ondo’s partnerships and integrations with asset managers, custodians, lawyers, and every other entity required to bring these assets on-chain.
Ondo offers a refreshing low-risk avenue for crypto-natives and a clear invitation for more risk-averse investors to go on-chain. Ondo adopts a conservative approach to risk and has front-loaded its focus on regulatory and tax compliance. Users who wish to access these services have to KYC, which will always be a mandatory component of accessing RWA products.
Despite this being a philosophical barrier to many participants, the reality is that the majority of crypto users have already KYCed with a centralized exchange at some point in their on-chain activities. And one cannot have the upside of RWAs unless one plays by the rules.
This permissioned access framework does distinguish Ondo and other RWA players significantly from other DeFi protocols. But this is part and parcel of the landscape in which they operate. RWA financial products, for example, bonds, are classified as securities; hence, to provide access Ondo must adhere to all the relevant laws and regulations surrounding these securities.
Ondo Finance has risen to this challenge admirably, and one of the most impressive characteristics of this protocol is its commitment to high-quality institutional partners. Every link of the operational chain integrates the first-rate service providers. BlackRock manages the underlying ETF for Ondo’s OUSG fund, and Ondo uses Coinbase, crypto’s most trusted custodian, to convert USDC to USD.
With such established partners, its conservative approach to risk and focus on compliance, Ondo truly delivers on its phrase institutional-grade finance on-chain.
Ondo Finance and the Real World Assets (RWA) Narrative
Ondo specializes in the US sovereign debt market. United States public debt stands at over $31.5 trillion, meaning there is no shortage of debt for market participants, and Ondo has plenty of scope to grow. Recent jobs data showed that American employers added 187,000 jobs in August, showcasing a resilient labor market, and this relative strength will likely lead Powell to introduce further rate hikes, meaning that the US Treasury Bond gravy train continues.
Risk appetite has evaporated throughout the bear market, and accessing yields backed by traditional asset classes has naturally become more appealing. On the flip side, DeFi provides liquid markets for traditional finance products, and with the US issuing more debt each year, it needs buyers. Additionally, the improved infrastructure rails – blockchain – make trading and ownership easier.
In summary, investors can earn 5% risk-free, and because the US government can print money to cover its outstanding debts, holding short-duration Treasuries essentially equates to holding dollars, but with yield. Blockchain-based operators like Ondo Finance are making access to these financial instruments more manageable than ever. And real-world assets in DeFi have become a central convergence point between traditional and future financial apparatus, and a growing industry within DeFi.
An Overview of the RWA Space
DeFi yields have declined with time and have steadily converged on the yields typically available within TradFi. This sentiment has long been propounded by Vitalik Buterin, who has also famously warned of the danger of yield and the danger investors encounter in the pursuit of yield.
Reminder: you do NOT have to participate in "the latest hot defi thing" to be in ethereum. In fact, unless you *really* understand what's going on, it's likely best to sit out or participate only with very small amounts.
— vitalik.eth (@VitalikButerin) August 14, 2020
There are many other kinds of ETH dapps, explore them!
The early adopter yields, especially yield farming rewards – which many will remember from the notorious DeFi Summer – were simply not sustainable. They were propped up by cheap liquidity, rampant speculation, and the constant influx of fresh capital into markets.
The space has witnessed an uncountable number of narratives this year, with notable examples including AI, China, memecoins, hamster racing, telegram bots, and GambleFi. But these narratives have been flashes in the pan, and the short duration is a poignant sign that crypto has seen no new inflows and, rather, the space participates in an elaborate game of on-chain musical chairs. However, as crypto matures, it makes sense that these yields converge with their TradFi counterparts, and to quote DegenSpartan, ‘‘Yield over 20% is an anomaly.’’
But one trend has been growing steadily. The RWA narrative has the hallmarks of an enduring narrative, given how it has slowly attracted TVL, and the current macro environment provides perfect foundations for it to flourish. Higher rates for longer means clipping coupons (receiving interest payments from US Treasury Bills) is highly profitable, and people want access to 5% risk-free rates.
Source: https://defillama.com/categories
Crypto has its own risk-free rate, Ethereum staking, but Treasury Bill yield has to be the closest thing the current financial apparatus has to a genuinely risk-free rate. The United States government supports and backs US Treasuries, and however investors view this, it is either a bet on the United States' military power or the strength of its institutions and governing body.
Arguably, the same coin viewed from opposing sides – this is the coercive nature of government. Regardless, those holding US bonds will continue receiving interest payments unless the United States collapses as a nation-state. And the high-interest rate environment means these payments sit comfortably above 5%.
The synergy between RWAs and DeFi explains their overwhelming success in recent months, and more players continue to wade into the game. The big three sectors currently consist of RWA lending, tokenized commodities (primarily gold), and debt markets, with Ondo focusing on the US sovereign debt market.
Source: https://redstone.finance/reports/rwa-report.pdf
Asset Tokenization, Demand, and Fees
Asset tokenization allows real-world assets to be transformed into digital assets residing on blockchains. This makes them far more liquid through broader market access and the introduction of fractional ownership.
Geographical barriers cease to exist, and settlements become nearly instant due to blockchain’s massive improvements in efficiency and speed compared to TradFi rails. Cut out intermediaries, and costs get reduced. Having fewer operators in the operational chain will always reduce cost and represents one of DeFi’s greatest strengths: the more direct value transfer between economic participants.
In short, tokenized assets boast better liquidity, bolstered accessibility, transparency, and still a relatively unexplored use case, composability.
Coming onto latent demand and the real clincher for the RWA narrative. Crypto’s most successful RWA product to date? Stablecoins. A dollar is a real-world asset, and the mass adoption of stablecoins provides evidence of the massive pent-up global demand for American assets, perhaps more precisely, assets denominated in dollars.
Stablecoins have offered a savings vehicle for millions of people in developing nations seeking to escape the rampant inflation of their native currencies driven by irresponsible fiscal policy. And if there is demand for dollars, there is certainly demand for US-denominated financial products. RWAs will be the vehicle for this latent demand to tap into the markets.
And finally, fees. Why are TradFi players excited about asset tokenization? Follow the money and look to the bottom line. Open an ETF that tracks short-dated Treasury Bonds to a highly liquid and global market, and the operator of that ETF nets sweet management fees on every deposit. TradFi’s bread and butter? Fees. More capital means more fees.
This is the perfect storm for the RWA narrative. Decades of high risk-free rates, bottled-up demand, massive interest from the supply side to earn, interest from the demand side for yield, and the opening and democratizing of access to financial products. Not to mention that fixed income makes up the bulk of RWAs, and fixed rates remain a relatively unexplored area within DeFi save for innovators like Pendle.
Now, let's take a closer look at Ondo's RWA products.
Ondo Products
Ondo Finance has already deployed several RWA products, with the three heavyweights being USDY, Ondo’s Funds, and Flux Finance, which has already been sold to the Neptune Foundation.
Source: https://ondo.finance/
OUSG Fund
Ondo’s flagship product prior to the launch of USDY. The breakdown of this product is very simple: tokenized on-chain ownership of BlackRock’s iShares Short Treasury Bond ETF. It provides liquid exposure to short-term US Treasuries.
This is as low risk as it comes, and USDC and USD also comprise a small percentage of the OUSG fund for liquidity purposes (redemptions). The process is straightforward: after completing the compliance checks and a USDC or USD deposit is made, Ondo exchanges USDC for USD (if applicable), uses the USD to purchase the assets, mints new tokens, deposits them in the specified wallet, and yield is autocompounded. At redemption, tokens are burnt, and USDC is received.
Source: https://ondo.finance/ousg
This on-chain on-ramp into BlackRock’s ETF comes with 0.15% management fees from Ondo, up to 0.15% in intermediary fees, and 0.15% management fees to BlackRock. It has attracted an impressive $165 million in TVL. However, with a minimum investment amount of $100,000 and stipulations that users accessing this product must be accredited investors and qualified purchasers (in layman’s terms, high net-worth individuals), this product is not accessible to most. It is worth noting these are the SEC’s rules, not Ondo’s.
A high capital barrier and stringent criteria put this product out of reach of the majority of DeFi participants. Still, it does open the door for DAOs with well-capitalized LLCs side branches to access Treasury yields fully on-chain.
USDY
Source: https://ondo.finance/usdy
Ondo’s most exciting product to date. An interest-bearing note. This stablecoin marks a great leap forward for crypto. It is perfect for users who want to earn a yield on stablecoin holdings with institutional-grade structural and operational protections.
The lack of yield from traditional stablecoins has become a pain point. Tether’s staggering quarterly ‘operational’ profit of $1 billion in Q2 this year has left investors feeling abandoned and left out in the cold. However, Tether was birthed in a zero-interest rate environment; therefore, its lack of profit-sharing avenues makes sense from a genealogical perspective.
Short-term US Treasuries and bank demand deposits collateralize USDY, and global individual investors can access institutional-grade yield. The leaps from a developmental perspective are twofold: yield structure and accessibility.
The yield structure: Ondo has explicitly designed USDY to deposit the bulk of yield with holders, marking a significant departure from other stablecoins. Ondo sets a variable interest rate monthly slightly below the yield of the underlying assets to account for operational expenses and charges 20 basis points (0.2%) for redemptions.
Regarding accessibility: USDY has daily redemptions, and the real winning component is that USDY can be freely transferred (40-50 days after purchase) to users on a secondary allowlist based on geographical criteria. As UDSY’s secondary marketplace grows in size, this bearer asset will provide greater global access to short-dated US Treasury yield.
USDY Eligibility
Source: https://ondo.finance/usdy
Looking at the eligibility criteria of USDY paints an intriguing picture of potential users:
Individuals or organizations cannot be located, organized, or a resident in any of the following locations:
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The United States, United Kingdom, or Canada
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Crimea, Cuba, Iran, North Korea, or Syria
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Albania, Barbados, Belarus, Cambodia, Colombia, Haiti, Jamaica, Japan, Myanmar, Nicaragua, Russia, Ukraine, Vanuatu, Venezuela, Yemen
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Any African country except Mauritius and South Africa
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Any countries of the Commonwealth of Independent States (ex-soviet states)
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Any country, territory, or geographical region that is the subject or target of any territory-wide sanctions.
Citizens of the above countries are ineligible regardless of residence, except those of the United States and the United Kingdom, which means that a UK citizen living in Germany is eligible.
The bulk of users will come from Europe, Latin America, and sections of Southeast Asia, alongside US or UK expats living in these regions. And despite the eligibility list appearing fierce at first glance, the target market is vast.
Better yet, the high capital barrier found in Ondo’s OUSG Fund disappears with the minimum for investment and redemption set at $500, with plans to decrease this substantially over time.
Given its high caliber investor protection, regulatory compliance, and direct value transfer of yield generated by the underlying assets to holders, USDY should easily become the gold standard for risk-averse investors who want to earn US-denominated yield on stablecoin holdings.
Flux Finance
Source: https://fluxfinance.com/
Flux Finance, initially built by the Ondo Finance team, has been sold but still qualifies under their umbrella of products. It is a fork of Compound V2, and this peer-to-peer lending protocol supports permissionless and permissioned assets.
Basic functionality allows users to deposit stablecoins and earn the supply APY. Users who deposit assets receive fTokens in return, and the exchange rate for fTokens steadily increases. At the point of redemption, users will receive a greater sum total of assets- similar to the wstETH model. An fToken is a receipt bestowing the right to reclaim deposited assets plus interest.
These yield-bearing assets have already found their way into DeFi, and the composability element of on-chain RWAs comes into play. Users holding fTokens can leverage them on protocols like Pendle or Penpie to engage in layered yield strategies. And this could provide one of the greatest breakthroughs for the RWA space.
Holding Treasuries and receiving interest payments is great, but holding digital assets representing Treasuries that earn yield while being able to employ these assets to access loans or engage in leveraged earning strategies is far more appealing. DeFi offers new levels of capital flexibility, and this composability works excellently with stable and reliable assets.
The central value proposition of Flux Finance is twofold. First, it allows users to earn supply-side APYs on stablecoins, who by depositing service the liquidity demands of OUSG (the permissioned asset integrated into Flux Finance) holders. OUSG holders can deposit OUSG as collateral, borrow USDC, and then leverage up on OUSG.
Hence, utilization rates stay high, and users not eligible to own OUSG can access decent rates due to these leveraged players. In short, accredited investors can access leverage on risk-free assets, arbitraging the difference between Treasury yield and borrow rate. And ordinary users can access solid yields in a quasi-loophole strategy while leveraging their minted fTokens in DeFi.
Ondo Future Tokenomics
Ondo has still yet to release a liquid token to the general public – the key word being liquid. The V1 documents state that the total supply is 10 billion with no plans for inflation, and the token will control the Ondo DAO, which is active according to data from Tally.
Source: https://www.tally.xyz/gov/ondo-dao/proposals
The release of liquidity for the token and access for the general public should likely occur given that Ondo raised $4 million from seed investors and $20 million in a Series A – VCs always want their money back. Additionally, Ondo completed a token sale via Coinlist in 2022, raising an additional $10 million from 18,000 unique buyers. And it appears these early investors can participate in governance.
But the bigger question remains: will Ondo discover a regulatory-compliant avenue for revenue share? Or will ONDO remain a simple governance token? Overall, the trajectory for the ONDO token appears uncertain at this current time. Likely, the protocol awaits more opportune market conditions before fully launching the token into the open market.
Ondo’s Future
Understanding that part of Ondo’s success, outside of its team's incredible vision and dedication, comes from macro conditions. Risk tolerance has dropped massively across the board, and TradFi rates (Treasuries) are at decade highs. This perfect storm, which has powered Ondo’s growth, will eventually unwind. The FED will cut rates, and risk-taking will once again take prominence. But while rates remain high, the game belongs to Ondo.
Asset tokenization is still at its inception point, and the total addressable market is, in a word, ludicrous. Blockchains can onboard a volume of liquidity unparalleled in DeFi, multiples larger than DeFi’s current TVL. The tokenization process disposes of entry barriers and appeals to both the supply and demand sides of markets due to increased fee generation and accessibility. This is alongside the improved efficiency, security, and transparency from putting real-world assets on-chain.
While these benefits are easily acknowledged, the real excitement stems from the composability potential of these assets. RWAs naturally make better collateral assets, given their greater inherent stability compared to crypto-native assets. The ability to collateralize, lend, and even yield farm with these assets will spawn multiple markets on top of the base assets, and markets love leverage. In the coming bull market, degenerates can always be depended on to degen, and the space will likely witness obscene leveraged strategies in the RWA space.
Moving forward, the exceptional caliber of Ondo’s rails into the US Treasury market will likely make it the market leader for on-chain Treasuries. And the US’s spiraling national debt means there will never be any supply shortage. But the landscape will look very different at even 3% compared to 5%, and very different again if interest rates return to zero or even negative. Still, one would like to hope that central bankers have learned the lesson and the cost of artificially low-interest rates compounded by excessive printing – but one can never be sure.
Still, regardless of interest rates, Ondo’s core mission of delivering institutional-grade financial products to a broader market audience gives it massive horizontal scalability. Its skill at tokenizing real-world assets and bringing them on-chain alongside its technical expertise within TradFi and skill at regulatory compliance means that the future direction of Ondo can and likely will be multifold.
This article is only for educational and informational purposes and should not be taken as financial advice. Always do your own research before investing in any protocols and tokens.
Kofi J has been active in DeFi since the 2020 summer explosion and has been rugged more times than he can remember. He hopes to make the decentralized economy a little bit more accessible through his prose. Follow the author on Twitter @k_pangolin
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